Credit agreements
1.1 Terminology and Concepts
National credit Act of 2005 (NCA)
What is a credit agreement?
A credit agreement is where credit is granted by one party to another usually in
return for interest or fees or charges or a combination of those
The granting of credit can take different forms:
- One party lending or advancing money to another party
Example 1: John borrows R100 000 from Big Bank and the amount is going to
be repaid in installments
Example 2: John gets a credit card from Nedbank
- The parties agree that the payment of money owed by 1 party to another for goods or
services will be delayed (deferred) to a future date
Example 1: John opens an account for the local pharmacy
Example 2: John opens an account at a retail store (edgars card, truworths card etc)
Example 3: John needs to have physio for 4 months (he goes 4 times a week)
and the physio bills him at the end of the month.
NOTE: whatever form the credit agreement takes to be governed by the NCA and to qualify
as a credit agreement under the act, there must be a cost to the debtor Cost can be
interest or fees or charges or a combination or payment of a lessor amount on early
settlement.
Refer to example 3 physio example: The physio’s account at the end of each month says
that if you settle by the 7 Th you will get a 20% discount.
Consumer
The consumer is the person who receives credit (debtor)
Credit provider
The person who extends/gives the credit
- Big bank, Nedbank, Pharmacy, Edgars, Truworths, Physio (from previous examples)
The importance of the National Credit Act (NCA)
- There will always be a power imbalance between the consumer and the credit provider
Ø We need to protect consumers from exploitation from powerful lenders
Ø The state protects consumers by creating rules for credit/lending
Ø The NCA is the latest and most far reaching credit legislation in South Africa and
became fully operative/effective in 2007
,The purpose of the Act is to “promote and advance the social and economic welfare of
South Africans ...and a fair (and) transparent ... credit market and industry, and to protect
consumers by:”
• Stopping reckless lending i.e. to people who many not be able to repay the loan or will
be over-burdened (over- indebted) by the loan or credit
• Promoting the development of a credit market that is accessible to all South Africans, in
particular those who have been historically unable to access credit
• Balancing the rights of credit providers and consumers
• More disclosure and information provided to consumers
• Dealing with over-indebtedness of the consumer
The goals of the act are in line with the goals of post-apartheid South Africa contract law
generally i.e. fairer contract law
Transformative constitutionalism
Changing the existing law to better encapsulate the rights and values of the Constitution
Also important is regulating access to credit
Financial exclusion
Inability to borrow in safe and affordable manner
Financial inclusion
All persons have timely and fair access to appropriate, fair and
affordable financial products and services
NOT EVERYONE IS ENTITLED TO CREDIT and THEREFORE IT IS A BALANCING ACT
1.2 Scope and application of the NCA
• The Act applies to every credit agreement made in South Africa OR an effect in South
Africa
• Both requirements don’t need to be met (can be either or)
Example: Mr X is a Namibian farmer and he leads R1 million to Mr Y who lives and works
in Cape Town. Interest and fees are charged. The contract between the 2 of them is
signed in Namibia. Mr Y is making the repayments from his South African bank account. It is
governed by the NCA (because it has an effect ) unless Mr Y applies to have it
exempted (see later)
NOTE: There are exception i.e. transactions made in South Africa or with effect in SA which
are excluded from the Act i.e. the consumers are not protected by the NCA These
excluded transactions will probably be governed by the common law
,Excluded Transactions (transactions not covered by the Act)
- A credit agreement in which the consumer is the state or an organ of stat(municipalities,
governmental bodies)
- A credit agreement in which the consumer is a juristic person whose monetary asset
value and annual turnover are each equal to or exceed R1 million at the time of the loan
( Juristic person in Act can include a partnership or trust)
- A “large agreement” where the consumer ANY juristic person (i.e. could have a
monetary asset value and annual turnover of less than R1 million each)
- Large agreement = credit agreement secured by a mortgage bond (regardless of the
loan amount) or any other credit transaction with a debt of R250 000 (principal amount,
NO interest) or more.
Example 1
X PTY LTD has an annual turnover of R900 000 and the asset value of
R250 000. They borrow R100 000 from the bank with interest and fees.
- Not a large agreement
- X will be protected by the act because the turnover and asset value are each under R1
million AND the loan is not a large agreement (no mortgage and under R250 000)
Example 2:
X PTY LTD has an annual turnover of R800 000. They borrow R150 000 from the bank
(principal amount) with interest and fees. That R150 000 loan is secured by a mortgage over
their business premises.
- X PTY LTD is a consumer under the act because they have an annual turnover under R1
million each but it is a large agreement because the loan is secured by a mortgage and
therefore excluded
- A credit agreement in which the credit provider is the Reserve Bank
- A credit agreement where the credit provider is located outside the republic and from
which the consumer has successfully applied for an exemption – see example above of
Namibia
- Insurance Policies
- Transactions between a stokvel and a member of that stokvel in accordance with the
rules of that stokvel
- Agreement that provides that a supplier of a ‘utility’ will defer payment for that utility
(water, electricity, refuse collection)
- Leases of immovable property (house or flat)
- Where the parties are not at “arm’s length” – examples from the act, the agreement is
not covered by the act:
Ø The one party is a juristic person in which the other party has a controlling interest. E.g
where you have a holding company and subsidiary
, Example:
Mr X is a director and majority shareholder of pty Ltd. He controls the company. If Ptd lends
Mr X money, it is not governed by the act because he controls Ptd Ltd
Ø The parties are family and dependent on each other
Example:
You are a 20-year-old student, and you have no income. Your mother lends you R10000 with
interest and fees (this would normally fall under the act because you are family) But
because you are family and you are dependent on her financial support, it doesn’t fall under
the act.
Example:
You are 22-year-old and you’re earning enough to support yourself. Your mom lends you
R30000 to buy a car with interest and fees. This is governed by the act as you aren’t
dependent on your mom.
Ø A loan by a company to a shareholder
Ø A loan by a shareholder to a company (which qualifies as a consumer)
*This is not a closed list, and the courts may add to the list
*Arm’s length catches all provision: to be at arms’ length both parties must have looked
after their own interests in negotiating the credit agreements and there must be no control
of one party by the other
*Use this general test if the facts you are faced with do not clearly fit one of the above listed
situations
1.3 Types of Credit Agreements under the NCA
The act applies to 3 different types of credit agreements and sometimes they may overlap
1. Credit Facility
- This is an agreement where the credit provider supplies goods or services or advances
(lends) money to the consumer or pays money to a 3rd party as directed by the
consumer.
- The consumer does not have to pay immediately for the goods or services or does not
have to repay the money immediately (so payment is deferred)
- In return for the credit facility, the credit provider charges fees and/ or interest
Examples:
Ø Credit card from the bank
Ø A loan by a bank or any person
Ø Store card or account
1.1 Terminology and Concepts
National credit Act of 2005 (NCA)
What is a credit agreement?
A credit agreement is where credit is granted by one party to another usually in
return for interest or fees or charges or a combination of those
The granting of credit can take different forms:
- One party lending or advancing money to another party
Example 1: John borrows R100 000 from Big Bank and the amount is going to
be repaid in installments
Example 2: John gets a credit card from Nedbank
- The parties agree that the payment of money owed by 1 party to another for goods or
services will be delayed (deferred) to a future date
Example 1: John opens an account for the local pharmacy
Example 2: John opens an account at a retail store (edgars card, truworths card etc)
Example 3: John needs to have physio for 4 months (he goes 4 times a week)
and the physio bills him at the end of the month.
NOTE: whatever form the credit agreement takes to be governed by the NCA and to qualify
as a credit agreement under the act, there must be a cost to the debtor Cost can be
interest or fees or charges or a combination or payment of a lessor amount on early
settlement.
Refer to example 3 physio example: The physio’s account at the end of each month says
that if you settle by the 7 Th you will get a 20% discount.
Consumer
The consumer is the person who receives credit (debtor)
Credit provider
The person who extends/gives the credit
- Big bank, Nedbank, Pharmacy, Edgars, Truworths, Physio (from previous examples)
The importance of the National Credit Act (NCA)
- There will always be a power imbalance between the consumer and the credit provider
Ø We need to protect consumers from exploitation from powerful lenders
Ø The state protects consumers by creating rules for credit/lending
Ø The NCA is the latest and most far reaching credit legislation in South Africa and
became fully operative/effective in 2007
,The purpose of the Act is to “promote and advance the social and economic welfare of
South Africans ...and a fair (and) transparent ... credit market and industry, and to protect
consumers by:”
• Stopping reckless lending i.e. to people who many not be able to repay the loan or will
be over-burdened (over- indebted) by the loan or credit
• Promoting the development of a credit market that is accessible to all South Africans, in
particular those who have been historically unable to access credit
• Balancing the rights of credit providers and consumers
• More disclosure and information provided to consumers
• Dealing with over-indebtedness of the consumer
The goals of the act are in line with the goals of post-apartheid South Africa contract law
generally i.e. fairer contract law
Transformative constitutionalism
Changing the existing law to better encapsulate the rights and values of the Constitution
Also important is regulating access to credit
Financial exclusion
Inability to borrow in safe and affordable manner
Financial inclusion
All persons have timely and fair access to appropriate, fair and
affordable financial products and services
NOT EVERYONE IS ENTITLED TO CREDIT and THEREFORE IT IS A BALANCING ACT
1.2 Scope and application of the NCA
• The Act applies to every credit agreement made in South Africa OR an effect in South
Africa
• Both requirements don’t need to be met (can be either or)
Example: Mr X is a Namibian farmer and he leads R1 million to Mr Y who lives and works
in Cape Town. Interest and fees are charged. The contract between the 2 of them is
signed in Namibia. Mr Y is making the repayments from his South African bank account. It is
governed by the NCA (because it has an effect ) unless Mr Y applies to have it
exempted (see later)
NOTE: There are exception i.e. transactions made in South Africa or with effect in SA which
are excluded from the Act i.e. the consumers are not protected by the NCA These
excluded transactions will probably be governed by the common law
,Excluded Transactions (transactions not covered by the Act)
- A credit agreement in which the consumer is the state or an organ of stat(municipalities,
governmental bodies)
- A credit agreement in which the consumer is a juristic person whose monetary asset
value and annual turnover are each equal to or exceed R1 million at the time of the loan
( Juristic person in Act can include a partnership or trust)
- A “large agreement” where the consumer ANY juristic person (i.e. could have a
monetary asset value and annual turnover of less than R1 million each)
- Large agreement = credit agreement secured by a mortgage bond (regardless of the
loan amount) or any other credit transaction with a debt of R250 000 (principal amount,
NO interest) or more.
Example 1
X PTY LTD has an annual turnover of R900 000 and the asset value of
R250 000. They borrow R100 000 from the bank with interest and fees.
- Not a large agreement
- X will be protected by the act because the turnover and asset value are each under R1
million AND the loan is not a large agreement (no mortgage and under R250 000)
Example 2:
X PTY LTD has an annual turnover of R800 000. They borrow R150 000 from the bank
(principal amount) with interest and fees. That R150 000 loan is secured by a mortgage over
their business premises.
- X PTY LTD is a consumer under the act because they have an annual turnover under R1
million each but it is a large agreement because the loan is secured by a mortgage and
therefore excluded
- A credit agreement in which the credit provider is the Reserve Bank
- A credit agreement where the credit provider is located outside the republic and from
which the consumer has successfully applied for an exemption – see example above of
Namibia
- Insurance Policies
- Transactions between a stokvel and a member of that stokvel in accordance with the
rules of that stokvel
- Agreement that provides that a supplier of a ‘utility’ will defer payment for that utility
(water, electricity, refuse collection)
- Leases of immovable property (house or flat)
- Where the parties are not at “arm’s length” – examples from the act, the agreement is
not covered by the act:
Ø The one party is a juristic person in which the other party has a controlling interest. E.g
where you have a holding company and subsidiary
, Example:
Mr X is a director and majority shareholder of pty Ltd. He controls the company. If Ptd lends
Mr X money, it is not governed by the act because he controls Ptd Ltd
Ø The parties are family and dependent on each other
Example:
You are a 20-year-old student, and you have no income. Your mother lends you R10000 with
interest and fees (this would normally fall under the act because you are family) But
because you are family and you are dependent on her financial support, it doesn’t fall under
the act.
Example:
You are 22-year-old and you’re earning enough to support yourself. Your mom lends you
R30000 to buy a car with interest and fees. This is governed by the act as you aren’t
dependent on your mom.
Ø A loan by a company to a shareholder
Ø A loan by a shareholder to a company (which qualifies as a consumer)
*This is not a closed list, and the courts may add to the list
*Arm’s length catches all provision: to be at arms’ length both parties must have looked
after their own interests in negotiating the credit agreements and there must be no control
of one party by the other
*Use this general test if the facts you are faced with do not clearly fit one of the above listed
situations
1.3 Types of Credit Agreements under the NCA
The act applies to 3 different types of credit agreements and sometimes they may overlap
1. Credit Facility
- This is an agreement where the credit provider supplies goods or services or advances
(lends) money to the consumer or pays money to a 3rd party as directed by the
consumer.
- The consumer does not have to pay immediately for the goods or services or does not
have to repay the money immediately (so payment is deferred)
- In return for the credit facility, the credit provider charges fees and/ or interest
Examples:
Ø Credit card from the bank
Ø A loan by a bank or any person
Ø Store card or account
